February 01, 2011

A strong January; 5.4 percent excess return

Christian Blaabjerg The Global Value Equity portfolio performed strongly in January with
Chief Equity Strategist most contribution coming from our stock selection, driven by CNP
ctb@saxobank.com Assurances and Almirall, with almost no help from our sector allocation.
+45 3977 4669

 The Saxo Bank Global Value Equity Portfolio would have made
Peter Garnry excess return of 3.4 percent1 in the three months since the actual
Equity Strategist inception in November 2010. In January, the portfolio returned 5.4
pg@saxobank.com percent compared to the 0.01 percent for the MSCI World EUR index.
+45 3977 6786
 Almirall, the Spanish pharmaceutical company, is, despite the 24
percent surge in January still a likely takeover candidate. The
extraordinary surge was driven by positive results from ATTAIN phase III
study. We have been saying for several months that Almirall is a takeover
candidate and in January Leerink Swann, a premier US investment bank
focused on healthcare, said AstraZeneca may consider buying Forrest
Laboratories or Almirall due to their attractive late-stage pipelines.

 We are still very bullish on insurance stocks and believe our

exposure will drive outperformance over the next quarters. Among
insurance stocks we prefer CNP Assurances (still our most bullish individual
case), Tryg, Catlin Group and Scor - all trading at attractive levels compared
to their earnings power and prospects.

1. Past performance disclaimer

This publication refers to past performance. Past performance is not a reliable indicator of future performance.
Indications of past performance displayed on this publication will not necessarily be repeated in the future. No
representation is being made that any investment will or is likely to achieve profits or losses similar to those
achieved in the past or that significant losses will be avoided.

Statements contained on this publication that are not historical facts and which may be simulated past
performance or future performance data are based on current expectations, estimates, projections, opinions and
beliefs of the Saxo Bank Group. Such statements involve known and unknown risks, uncertainties and other
factors, and undue reliance should not be placed thereon. Additionally, this publication may contain 'forward-
looking statements'. Actual events or results or actual performance may differ materially from those reflected or
contemplated in such forward-looking statements.
 February 01, 2011

Global Value Equity Portfolio – February 2011

Changes to the February portfolio

Only one stock placed on the bench despite a strong showing from many constituents
Helvetia Holding returned 3.46 percent in January and its relative valuation has benched the
stock for now. It helped the portfolio outperform as the benchmark only returned 0.01
percent in January. That was despite it being downgraded to “underperform” by Credit
Suisse.

So, which stock is in for February?

CapitaCommerical Trust, a property trust company located in Singapore, is the new kid on
the block following a 4.7 percent decline in January adding to its relative valuation. The
company is currently valued at CAPE ratio (price over average three years earnings per
share) of 9.42 and a price-to-book of 1.2. During January UBS maintained its “buy”
recommendation on the stock and on current levels we think it could add 10-20 percent in
gains before losing its relative valuation attractiveness.

Our February portfolio is comprised of the following stocks:

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 February 01, 2011

The portfolio is still highly overweight financials stocks.

Financials, particularly insurance stocks, are still trading at attractive levels relative to their
earnings power over a normal economic cycle and we expect our insurance stocks to
perform well over the next quarter.

The portfolio’s currency exposure is primarily in EUR, GBP and HKD (75 percent).
The main currency exposure is unchanged from last month with high concentration in EUR,
GBP and HKD. As Helvetia Holding left our portfolio and CapitaCommerical Trust replaced it,
we changed a minor five percent exposure from CHF to SGD.

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 February 01, 2011

Global Value Equity Portfolio – January 2011

In January the portfolio returned 5.42 percent compared to 0.01 percent for MSCI World
EUR index. Since inception in November 2010 the portfolio is up 11.9 percent compared to 8.5
percent for the MSCI World EUR index which corresponds to a 3.4 percentage point outperformance
in three months.

Which stocks were strong performers in the portfolio?

Almirall, the Spanish pharmaceutical company, surged 24.0 percent in January following
positive results from its‟ ATTAIN phase III study which the company develops in
cooperation with Forrest Laboratories. The company is still valued attractively compared to
its earnings power and late-stage pipeline making it an obvious takeover candidate for
another pharmaceutical company with trouble in its pipeline.
CNP Assurances, the French life insurance company, rose 19.2 percent in January on no
significant public announcement but was raised to “outperform” and “overweight” from
Credit Suisse and HSBC respectively. Their target price range is around EUR 19.50-20
which is a 21.1-24.2 percent premium from January‟s closing price.
Kowloon Development, the Hong Kong based developer of properties, put on 17.8 percent
in January on increased risk appetite for Asian real estate exposure.

Which stocks held the portfolio back?

Ten Network Holdings, the Australian operator of commercial television stations, declined
5.8 percent in January on no public news or events; actually it was upgraded by RBS. We
see minor upside in this stock compared to the rest of the portfolio.
Amlin, the U.K. insurance and reinsurance company, declined 4.2 percent in January due to
a profit warning following a revision of the estimated costs from the earthquake in New
Zealand; the costs doubled from first anticipated by management.

January portfolio performance

Performance attribution

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 February 01, 2011

Portfolio basics
Value creates excess risk-adjusted return. This equity portfolio is based on classical deep value
criteria mixed with a quality indicator based on a Piotroski score. Our portfolio would have produced
excess risk-adjusted return in the back testing period of 10.3%; the annual return was 10.7% p.a.
compared to 0.4% p.a. return for our benchmark, the MSCI World Index EUR.

Global portfolio without constrains. Our equity portfolio has no constraints in terms of exposure
restrictions towards geography or sectors. The portfolio seeks to exploit deep value opportunities
wherever they are located in the world. We have found during back-testing that the additional risk
taken by this approach is sufficiently offset by the extra return received.

Equal weighted portfolio. The portfolio is based on an equal weighted approach and the monthly
return is calculated accordingly on these weights.

The portfolio is not hedged to offset movements in the currency markets. In order to
reduce the impact on returns from currency fluctuations the investor must hedge all currency
exposure on a monthly basis using the currency exposure pie chart that can found in the
publication.

The portfolio’s returns are calculated on gross basis (excluding dividends, transaction
cost and taxes). Net returns after taxes may vary between investors due to different tax
treatments on dividends and capital gains depending on the tax jurisdictions. Transaction cost may
vary between different brokers and, indeed, between clients.

Due to the monthly rebalancing of the portfolio monthly transaction costs of 0.25 percent
are higher than for a traditional buy and hold portfolio. Based on a sample test the portfolio‟s
monthly dividend return of around 0.5 percent compensates for the above monthly average
transaction costs estimated to be around 0.25 percent. The back-test‟s positive risk-adjusted results
are excluding dividend and transaction costs which would normally give rise to concerns about
alpha when correcting for transaction costs. However, our sample tests on the back-testing period
show that dividends offset the transaction costs.

The new portfolio. The Global Value Equity Portfolio portfolio is an update of the original portfolio
we released in September 2010. In further testing we found that by changing the parameter
settings we could receive a better risk adjusted return. Furthermore, we now have monthly holding
periods creating a composite index.

Research methodology
Saxo Bank’s Global Value Equity Strategy portfolio is designed to address the classic
challenge in equity portfolio research: how to produce excess return given a benchmark
index. The aim, therefore, is to create a portfolio that generates a positive Sharpe Ratio indicating
the portfolio produced excess return over the risk-free rate for each unit of risk taken.

According to the existing literature in the field it is possible, using various value criteria,
to create a portfolio that outperforms the chosen benchmark index on a risk-adjusted
basis. Studies such as Fama and French (1992), Lakonishok, Shleifer and Vishny (1994) and
Piotroski (2002)1 document that significant excess return is possible for high book-to-market
portfolios (that is a portfolio with a low price-to-book ratio). Following this line of research our
portfolio uses Benjamin Graham deep value criteria (published by Rea in a Journal of Portfolio
Management article from 1977)2, amongst other criteria, such as: a trailing earnings yield (more

1
Eugene F. Fama and Kenneth R. French (1992), The Cross-Section of Expected Returns, The Journal of Finance, vol. XLVII, no.
2, pp. 427-465; Josef Lakonishok, Andrei Shleifer and Robert W. Vishny (1994), Contrarian Investment, Extrapolation, and Risk,
The Journal of Finance, vol. 49, no. 5, pp. 1541-1578; Joseph D. Piotroski (2002), Value Investing: The Use of Historical
Financial Statement Information to Separate Winners from Losers, The University of Chigago School of Business.
2
James B. Rea (1977), Remembering Benjamin Graham – Teacher and Friend, Journal of Portfolio Management, vol. 3, no. 4,
pp. 66-72.
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 February 01, 2011

specifically CAPE3) greater than twice the corporate bond yield, a dividend yield at least equal to
two-thirds of the corporate AAA bond yield and a low debt-to-equity ratio.

The Saxo Bank Global Value Equity portfolio is constructed using a bottom-up approach
which de-emphasises the significance of economic and market cycles. On this basis, the
portfolio will be fully-invested at all times. One of the consequences of being invested at all
times is downward pressure on the portfolio‟s alpha while creating a higher beta. The latter
argument is not that intuitive because value stocks are typically perceived as producing stable
returns (low beta and positive alpha). This is mitigated because we are using deep value criteria
that will increase the number of companies with depressed valuations, which will lead to higher
volatility (beta). Note, higher volatility does not necessarily mean higher risk (as in underlying
business risk). Our hypothesis is the portfolio will compensate on a risk-adjusted basis for our risk-
taking in these depressed and neglected companies measured as low P/B stocks.

Our monthly stock sample is selected according to our search criteria and the universe is
cash equities available to trade on the Saxo Bank trading platforms 4. We also limit the
universe to primary issues (listings), but include inactive stocks to ensure the population does not
include survivorship bias from excluding bankruptcies, mergers and delisting etc. The difference
between active and inactive population of stocks is 19,490 and 37,301 irrespectively.

Our research design is based on a few screening criteria such as market value, average
daily trading volume, cyclical adjusted price earnings (CAPE), dividend yield and interest-
bearing debt over equity. To generate a portfolio with medium-to-low business and liquidity risk
only stocks (and companies) with a market capitalisation above USD 1 billion (as of 2010
approximately 2,460 companies pass this criterion) and 60-day average daily trading volume above
EUR 1.5 million are permitted. The CAPE 3-year parameter is set to maximum of 16 which equals a
minimum earnings yield of 6.25%. This constraint limits the sample to stocks with conservative
valuations. The dividend yield should at least equal two-thirds of the corporate AAA bond yield
which on average through the back-testing period is a minimum of 3.3%. Interest-bearing debt
should be less than two-thirds of equity excluding highly leverage companies. Benjamin Graham
preferred stocks with P/B ratios below two which we are also applying in our.

The first iteration of the portfolio was built on a trailing earnings (CAPE 7-year) yield
greater than twice the corporate AAA bond yield. However, this limited our sample too
much (sometimes only five stocks passed our screening in a single month). Thus we
changed the parameter to CAPE 3-year below 16 to increase the monthly sample. The problem
presented was that a relatively high stable corporate AAA bond yields around five percent, which in
return equals an earnings yield of at least 10%. For this to be met CAPE 7-year would have to be
below 10, which is virtually impossible to obtain for long periods in the equity market – we would
not be able to be invested at all times in the equity market.

Back-testing methodology
We set the last day of the prior month as our back-testing date. For example when back-
testing January 2006 we use the back-testing date of 31 December 2005. Each monthly screening
provides the stocks that pass our criteria and returns all relevant parameter data. The start back
test date is set at 31 December 2004, which means that the portfolio‟s beginning date is 1 January
2005. This provides us with 70 monthly return observations which are sufficient enough to generate
valid statistical analyses such as beta, alpha, Sharpe ratio and Treynor measures.

3
CAPE is the current market price divided with a chosen period of earnings per share (EPS) and the concept was first published
and used by Benjamin Graham and David Dodd in their book Security Analysis (1934). They emphasised using no less than five
years of annual EPS. The concept is based on adjusting the EPS for cyclical upward or downward extremes (smoothing out the
earnings pattern). Through our iterative research we observed that our mix of value criteria produced a too narrow a sample to
conduct a diversified portfolio in some early observation (particularly in 2005). From a sensitivity analysis of our parameters the
CAPE parameter came out as the most sensitive. On this basis we concluded to change our CAPE parameter from originally CAPE
7 yr. (current market price divided with the latest seven years of annual EPS) to CAPE 3 yr. We will use CAPE and CAPE 3 yr.
interchangeably in this paper.
4
See appendix for the stock exchanges on which Saxo Bank facilitates cash equity trading.
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 February 01, 2011

In order to avoid having look-ahead bias in our portfolio we use lagging arguments on all
relevant parameters in the portfolio. Our data provider does not have a point-in-time database
on fundamental data, meaning that if our back-testing date is 31 January 2006 and we are looking
back on the last annual report data, we receive annual report data from 2005 instead of 2004
despite the information first being available to the public in February or March 2005. By
implementing three month lagging arguments on all relevant parameters, we avoid having look-
ahead bias in our portfolio.

Each month the screening output is analysed and the stocks are ranked based on a
weighted average of separate rankings for Piotroski score, CAPE and P/B. The 20 stocks
with the lowest weighted ranking (most attractive valuation and Piotroski score) are selected as the
forthcoming month‟s portfolio. Based on the monthly price return adjusted to currency cross
changes in EUR we calculate the portfolio‟s equally weighted return for that month.

The portfolio is rebalanced every month, thus the holding period is dynamic in the sense
that a stock will be re-elected to our portfolio if it still is among the 20 most promising
stocks in terms of valuation and Piotroski score. A stock that increases far more in price
relative to other value stocks will probably have a short holding period. If the potential price
appreciation has not materialised yet the stock will usually remain in the portfolio.

In back-testing, our portfolio would have produced an annual gross return, excluding
dividends (monthly dividends are estimated to be 0.5 percent) and transaction costs
(monthly costs estimated to be 0.25 percent), of 10.7% compared to 0.4% for MSCI
World Index EUR. See our comments about transaction costs under „Portfolio basics‟. Even though
our weighted holding period is shorter compared to the normal value philosophy the total return
compensates for the additional costs related to our monthly rebalancing. Our portfolio produced
excess return over the MSCI World Index EUR in 40 out of 70 months. This corresponds to around
57.1% positive excess return observations throughout the back-testing period.

We calculate the Sharpe ratio, beta, alpha, R2 and correlation based on monthly return
observations for the portfolio and MSCI World Index EUR. We use the iBoxx EUR Treasuries
1-3Y Total Return Index as our risk-free rate. Beta and alpha are calculated with linear regression of
the portfolio‟s and MSCI World Index EUR‟s monthly excess return over the risk-free rate. The
portfolio performed well over the back-testing period with a positive Sharpe Ratio of 0.08 (on a
monthly basis), beta of 1.38 and alpha of 0.01 with R2 of 80.9% and correlation between monthly
return of the portfolio and MSCI World Index EUR of 81.8%.

The portfolio’s return distribution over the back-testing period has had a positive
skewness and excess kurtosis. Our portfolio has a positive skewness of 0.06 indicating that the
return distribution has an asymmetric tail extending towards more positive values. But the value
lies within one standard deviation and thus the value is probably just a chance fluctuation from zero
– that is the return distribution is probably symmetric. Our portfolio has an excess kurtosis of 4.33
which means that the returns follow a leptokurtic distribution (more peaked values). Our portfolio‟s
kurtosis lies above two standard deviations indicating that our portfolio has significantly peaked
return distribution which point towards it having fat tails (higher probabilities of larger positive and
negative monthly returns). Thus we should expect large positive as well as negative returns.
Historical data also suggests the maximum monthly return since 2005 has been 27.5% for the
portfolio compared to 11.1% for MSCI World Index EUR5.

5
This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of
past performance displayed on this publication will not necessarily be repeated in the future. No representation is being made
that any investment will or is likely to achieve profits or losses similar to those achieved in the past or that significant losses will
be avoided.
Statements contained on this publication that are not historical facts and which may be simulated past performance or future
performance data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such
statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Additionally, this publication may contain 'forward-looking statements'. Actual events or results or actual performance may differ
materially from those reflected or contemplated in such forward-looking statements.

7
 February 01, 2011

Appendix - stock exchanges available for trading (cash

equity)

 American Stock Exchange

 Euronext Amsterdam

 Australian Stock Exchange Ltd.

 Euronext Brussels

 OMX Copenhagen

 OMX Copenhagen – First North

 Hong Kong Stock Exchange

 OMX Helsinki

 Euronext Lisbon

 London International Exchange

 London Stock Exchange SEAQ Market

 London Stock Exchange SETS Market

 Milano Stock Exchange

 NASDAQ Global Markets

 NASDAQ Capital Markets

 New York Stock Exchange

 NYSE ARCA

 Oslo Stock Exchange

 OTC Bulletin Board on NASDAQ

 Euronext Paris

 Singapore Exchange Securities Trading Limited

 Sistema De Interconexion Bursatil Espanol

 OMX Stockholm

 OMX Stockholm – First North

 Swiss Exchange

 Wiener Börse (Vienna) Stock Exchange

 SWX Europe

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 February 01, 2011

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notice (neither prior nor subsequent).

This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past
performance displayed on this publication will not necessarily be repeated in the future. No representation is being made that any
investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be
avoided.

Statements contained on this publication that are not historical facts and which may be simulated past performance or future
performance data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such
statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Additionally, this publication may contain 'forward-looking statements'. Actual events or results or actual performance may differ
materially from those reflected or contemplated in such forward-looking statements.

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